Do Mandatory Retirement Contributions Crowd Out Voluntary Contributions?
Retirement plans differ in whether employee or employer contributions are mandated, leaving a critical role for voluntary contributions.
Economic theory predicts that required contributions will “crowd out” voluntary contributions by up to five percentage points (pp). To test the theory, this study analyzes how employees responded to a shift in required contribution rates at a large public university. Starting in 2010, the university’s defined contribution plan enacted two key changes: the employer contribution rate fell by 1.5 pp and a mandatory employee contribution rate of 5% was established. The results suggest evidence of crowd out, but not to the degree anticipated.
This study was presented at the June 25, 2020, TIAA Institute Fellows Symposium. To view additional research that was presented, go to the 2020 Fellows Symposium Overview.
Using the university’s administrative records, the authors compared saving decisions of 2,867 new faculty hires over a 10-year period spanning five years before the change in contribution rates to five years after the change.